July 2, 2023
I first wrote about Journey Energy (JRNGF) on December 21, 2021 here: https://boolefund.com/case-study-journey-energy-jrngf/
Since then, the stock has gone from $1.73 to $4.13, an increase of almost 140%. But the company’s cash flows have also increased significantly, meaning the stock is nearly as undervalued today as it was in December, 2021.
OIL PRICES
Here is an excellent article on oil prices and opportunities in oil by Josh Young of Bison Interests: https://seekingalpha.com/article/4606923-recession-fears-mean-opportunity-in-the-oil-market
Here is another excellent article on oil prices: https://seekingalpha.com/article/4609520-the-oil-market-is-at-the-inflection-point-for-2023
OPEC+ has not only continued to cut production targets, but it has been under-producing its targets simply because it cannot produce more. Meanwhile, oil demand is healthy and increasing about 1% a year.
No one can predict oil prices, especially over shorter periods of time. But demand is likely to exceed supply going forward, and inventories are likely to decline. This probably means higher oil prices in the range of at least $75-90 per barrel (WTI).
But even if oil prices were to stay closer to $65-70, Journey Energy would still be very profitable.
If there’s a recession, oil prices could decline temporarily, but would quickly snap back.
The CEO of Journey Energy, Alex Verge, says that after a downtrend in oil prices from 2014 to 2020, oil prices are now in an uptrend that could last five to seven years. Here is an excellent conversation with Alex Verge: https://www.youtube.com/watch?v=3H_VD7rrhTg&t=2s
One final point. Even if car manufacturers started making only all-electric vehicles today, oil demand would keep rising for many years, as Daniel Yergin points out in The New Map.
I am, of course, in favor of the transition to a post-fossil fuel economy. But the global economy needs a lot of oil in order to make that transition over the next several decades.
The oil and gas industry will exist in close to its current form 10 or 20 years from now, as Jeremy Grantham has noted. (As well, most oil companies do not have more than 15-20 years of reserves.) The fact that some investors are no longer investing in oil and gas companies means that oil and gas stocks now have even higher expected returns.
JOURNEY ENERGY (JRNGF)
Here is Journey Energy’s most recent investor presentation: https://www.journeyenergy.ca/wp-content/uploads/Reports/Presentations/2023_Corporate_Presentation_March_Final.pdf
The current market cap is $248.7 million, while the current enterprise value (EV) is $295.5 million. The stock price is $4.13.
Here are the multiples:
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- EV/EBITDA = 3.06
- P/E = 2.10
- P/NAV = 0.38
- P/CF = 3.20
- P/S = 1.28
(We use P/NAV instead of P/B. The NAV is based on total proved plus probable reserves.)
The Piotroski F_Score is 7, which is good.
Currently, TL/TA is 50.3%. This continues to decline as Journey Energy pays down its debt.
Insider ownership is 10%. That is worth $24.9 million. Insiders–especially and deservedly CEO Alex Verge–will make a good deal of money if the company does well going forward.
Very importantly, Journey has a power generation business that will likely be worth at least $150 million by early 2024. See: https://bisoninterests.com/content/f/100mm-power-generation-transaction-implies-upside-for-journey
Note: The Bison article values the power generation business at $196 million in Canadian dollars. That translates into $150 million in U.S. dollars.
Intrinsic value scenarios:
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- Low case: If there is a recession or a bear market, the stock could temporarily decline 50%. This would be a major buying opportunity.
- Mid case: JRNGF is currently at 3.20 x cash flow, but it should eventually be at least at 8 x cash flow. That would make the stock worth $10.33, which is 150% higher than today’s $4.13.
- High case: Journey’s power generation business will likely be worth at least $150 million by early 2024. That would make the stock worth $12.79, which is 210% higher than today’s $4.13.
- Very high case: Journey’s power generation business will likely be worth at least $150 million by early 2024. Moreover, if the oil price averages $95 (WTI), then cash flow from the oil and gas assets would increase at least 50%. At 8 x cash flow, the stock would be worth $17.96, which is over 330% higher than today’s $4.13.
Risks
If there’s a recession, oil prices could decline temporarily but would snap back.
BOOLE MICROCAP FUND
An equal weighted group of micro caps generally far outperforms an equal weighted (or cap-weighted) group of larger stocks over time. See the historical chart here: https://boolefund.com/best-performers-microcap-stocks/
This outperformance increases significantly by focusing on cheap micro caps. Performance can be further boosted by isolating cheap microcap companies that show improving fundamentals. We rank microcap stocks based on these and similar criteria.
There are roughly 10-20 positions in the portfolio. The size of each position is determined by its rank. Typically the largest position is 15-20% (at cost), while the average position is 8-10% (at cost). Positions are held for 3 to 5 years unless a stock approaches intrinsic value sooner or an error has been discovered.
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